Outlook for UK economy March 2017 Our latest forecasts Households The labour market Exchange rate and prices Key judgments Outlook for UK economy March 2017 Mauricio Armellini @BoENorthEast

Our latest forecasts Households The labour market Exchange rate and prices Key judgments

GDP forecast – November 2016

GDP forecast – February 2017

Why the upgrade? Easier fiscal policy: half of upgrade In decreasing order of importance: Easier fiscal policy: half of upgrade Stronger outlook for global economy: 25% of upgrade Supportive financial conditions in the UK Strong household consumption -Autumn Statement -USA: easier fiscal policy; improvements in financial conditions and business confidence; employment growth robust. -Europe: stronger consumer and business confidence. Monetary & fiscal policy supporting further growth. -Emerging markets: robust growth in China; Brazil and Russia emerging from recession; rises in commodity prices helping others. -Supportive financial conditions in the UK: low rates for consumers and corporates, cheaper sterling. -Strong household consumption ahead of coming squeeze in real incomes

Unemployment forecast – February 2017

CPI inflation forecast – February 2017

Market’s expectations for interest rates (a) The February 2017 and November 2016 curves are estimated using instantaneous forward overnight index swap rates in the fifteen working days to 25 January 2017 and 26 October 2016 respectively. (b) Upper bound of the target range. Sources: Bank of England, Bloomberg, European Central Bank (ECB) and Federal Reserve.

Market’s expectations for interest rates (a) The February 2017 and November 2016 curves are estimated using instantaneous forward overnight index swap rates in the fifteen working days to 25 January 2017 and 26 October 2016 respectively. (b) Upper bound of the target range. Sources: Bank of England, Bloomberg, European Central Bank (ECB) and Federal Reserve.

Market’s expectations for interest rates (a) The February 2017 and November 2016 curves are estimated using instantaneous forward overnight index swap rates in the fifteen working days to 25 January 2017 and 26 October 2016 respectively. (b) Upper bound of the target range. Sources: Bank of England, Bloomberg, European Central Bank (ECB) and Federal Reserve.

Our latest forecasts Households The labour market Exchange rate and prices Key judgments

Consumption and real income growth

Consumer credit growth

Credit and consumption growth (a) Four-quarter net flow of consumer credit divided by four-quarter nominal household consumption. Data are non seasonally adjusted sterling net lending by UK MFIs and other lenders to UK individuals excluding student loans. (b) Dealership car finance lending is estimated using the change in outstanding stock and it may therefore reflect breaks in the series. Data are not yet available for 2016 Q4. Sources: Bank of England, Finance & Leasing Association, ONS and Bank calculations.

Our latest forecasts Households The labour market Exchange rate and prices Key judgments

Headline figures

Headline figures

Wage growth hasn’t picked up as projected… Why?

…because… Low productivity growth → low wage increases Lower inflation → less pressure on companies to increase wages -For point 2: recent rise in import costs for companies following depreciation present risk to wage projections in 2 directions: firms could seek to offset those increased costs by pushing down labour costs (wages), or those higher costs could increase inflation and therefore generate upward pressure on wages -We’ve been making those points for some time…but unemployment remains low and wages haven’t picked up. So now we think that there’s an additional ingredient… Slack may be higher than previously thought. Equilibrium unemployment rate down from 5% to 4.5%.

Our latest forecasts Households The labour market Exchange rate and prices Key judgments

Import price inflation

Food CPI and food import prices

Contributors to CPI inflation

Our latest forecasts Households The labour market Exchange rate and prices Key judgments

Three crucial judgements for forecasts Cheaper sterling continues to boost consumer prices without affecting inflation expectations Regular pay growth remains modest, consistent with our updated assessment of slack Household spending growth slows as real income gains weaken

Q&A @BoENorthEast Our latest forecasts Households The labour market Exchange rate and prices Key judgments @BoENorthEast Mauricio.Armellini@bankofengland.co.uk